Certified Government Financial Manager (CGFM) Practice Exam 2025 - Free CGFM Practice Questions and Study Guide

Vertical equity is a principle in taxation that emphasizes fairness in how individuals are taxed based on their differing ability to pay. The concept suggests that individuals with higher incomes should contribute a larger amount or a higher percentage of their income in taxes than those with lower incomes. This approach acknowledges that people with different income levels have different capacities to bear the tax burden.

When taxpayers with varying income levels are taxed at different rates or amounts, it helps to ensure that the taxation system is progressive, meaning that it aims to reduce income inequality by placing a larger financial burden on those who can afford to pay more. This is consistent with the broader goals of social equity and economic justice. Therefore, this understanding of vertical equity reinforces the idea that taxes should be based not only on income but also on the principle of ability to pay, making the selected answer accurate in reflecting the definition of vertical equity in taxation.